IRS Ruling Clarifies Non-Deductibility of PPP Expenses

Updated As of November 20, 2020 at 1 pm

On Wednesday evening the IRS issued Revenue Ruling 2020-27 to provide clarity on tax deductions related to expenses that were paid with funds from Paycheck Protection Program loans. The ruling clarified that calendar year taxpayers may not deduct these expenses for the 2020 tax year if the taxpayer reasonably expects their PPP loan to be forgiven or has already received forgiveness; in essence, the PPP loan will be taxable in 2020 if forgiveness is expected or obtained.

This denial of eligible expenses can apply even if the taxpayer has not filed for forgiveness as of December 31, 2020. According to the ruling, a reasonable expectation of forgiveness exists if the taxpayer has satisfied all requirements to obtain forgiveness in 2020 and plans to apply for the forgiveness in 2021.

As a reminder, the IRS issued noticed 20-32 in late April informing taxpayers that eligible expenses paid with PPP funds were disallowed tax deductions if the PPP loan was later forgiven. There was uncertainty on what tax year these expenses may be considered disallowed depending on when a taxpayer filed for forgiveness. Revenue Ruling 20-27 has eliminated this uncertainty.

The IRS also provided a safe harbor for deducting expenses paid for with PPP funds if the taxpayer is later denied forgiveness or never requests forgiveness for their PPP loan. The details of this safe harbor are provided in Revenue Procedure 2020-51.

This latest development may provide those with PPP loans the comfort to apply for forgiveness as soon as possible if they haven’t already. There is still a possibility that Congress could allow these eligible expenses to be deductible by passing legislation. We will continue to monitor the situation, and we encourage all clients to reach out to their MHCS team to discuss this latest guidance.